Global Real Estate Wavers

Houseprices in the UK are still extremely high.
No secret about that, writes John Stepek, editor of MoneyWeek magazine.

But
we've known for a while that prices at the high end (and increasingly the lower
end) in London are struggling. They're still unaffordable, but they're a tiny
bit less unaffordable than they once were.

However,
while it's tempting to look at our market and wonder what's going on (is it
Brexit? Is it the Northern Powerhouse?), the reality is that it's not just
London.

In fact,
house prices across the globe – particularly the expensive bits – are starting
to come off the boil.

Coincidence?
We doubt it.

It's
early days, but house prices across the world's most expensive markets seem to
be starting to struggle.

Here are
a few headlines for you. In Norway, prices across the country started falling
last year, after rising by 12% in 2016. By December 2017, they were falling at
an annual rate of 2.1%. In the capital of Oslo, they fell by 6.2%.

Now,
Norwegian houses are not cheap. Indeed, credit ratings agency Moody's concluded
that – compared to the historic norms, as judged by the rents to house prices
ratio – Norway had the single most expensive market of 20 advanced economies
(including Britain, although that's partly a function of Britain's consistently
bubbly housing market).

Not
coincidentally, the central bank's main interest rate sits at 0.5%. However,
the bank has hunted at raising rates. And at the start of last year, it also
imposed a few mortgage lending restrictions – including a requirement for
higher deposits and lower income multiples.

Elsewhere
in Scandinavia, we have Sweden. In November, house prices were down by 0.2% –
the first annual fall since May 2012. "The drop," says Bloomberg,
"is being led by high-end apartments in Stockholm."

The
country has introduced tighter mortgage rules, but there has also been a steep
increase in supply.

Or how
about Canada? Once a blisteringly hot market – with prices rising at an annual
rate of more than 30% at one point last year – house prices in Toronto have
fallen by 8.9% since May 2017, according to the Toronto Real Estate Board.
According to Bloomberg, that's the steepest decline on record – although said
records only go back to 2000. Prices are now up just 0.7% on an annual basis.

What's
changed here? A foreign buyer tax has been introduced (although apparently not
a big driver of sales in the city). The government has introduced tighter
mortgage guidelines. And the number of new listings has picked up (although
presumably that's a side effect of people realising the fun's over).

And then
there's an anecdote from another very expensive area – Manhattan. New York's
answer to Mayfair has seen rents starting to fall hard. In December, rents fell
by 2.7% year on year (you're still having to pay an average of more than $3,000
a month). And that doesn't include "sweeteners" such as
"free" months or gift cards.

In this
case, it's being put down to rising supply – too many new luxury developments
coming on stream at once.

Even in
Australia – the "lucky country" – there are signs of house price
growth easing off, although you're still talking about 6.1% annual gains in
November, compared to 9.7% to the end of June.

My
colleague Merryn has written about the state of the UK housing market in a
piece we'll have on the website early next week, but there are elements of
similarities – tighter rules, higher supply at the luxury end, concerns about
rising rates.

So
what's going on?

It does
seem odd that we're seeing a bit of a global synchronisation with house price
wobbles here.

There
seem to be a few things going on. Firstly, politically, the climate has turned
against property speculation. So you've got foreign investors being targeted.
There are few things more politically popular than blaming a foreigner – even
better, a rich foreigner – for a domestic problem, and governments across the
globe have lapped this story up.

There
are also moves in many countries to tax owners of second homes more vigorously,
be they landlords or simply people who own more than one home.

Underlying
all this however, is the more significant point – it's not about the specifics,
it's about the tone. If you're a "globalist" rich person, you now
want to keep your wealth liquid. The number of guaranteed safe havens has been
narrowing steadily – it's all part of the anti-globalisation swing – and nowadays
there just isn't anywhere obvious where you might want to set up a permanent
base where you can be reasonably sure that the political environment won't
swing against you badly.

So
that's politics. The next shift is supply: this is mainly affecting the high-end
areas. Usually with house prices, we tend to focus on demand – and that makes
sense. Unleashing more money for mortgage lending (and thus more money for
buying houses) takes two seconds. Unleashing more supply (building actual
houses) takes forever in Britain and isn't much faster in most countries.

So
usually demand is all that matters. Because demand is, in theory, effectively
infinite (there's no technical limit to the volume of money that can be created
to pump into the housing market), whereas supply is pretty tightly restricted
by comparison.

But
eventually, given enough incentive, supply does grow. And if you have demand
remaining static or being curbed (in the form of mortgage restrictions), then
you have a (probably brief) window in which that supply can actually make a
difference to prices. And that seems to be happening right now too.

However,
that leads us to the real key point on this: it's not really about supply
rising, it's about the volume of money going into the property market having
reached a peak.

We now
know that – barring another deflationary collapse event, which would of course
be bad news for all asset prices, including houses – interest rates have now
bottomed. Central banks across the globe are now talking about pushing them
higher, or at least easing off on the quantitative easing.

That
means the cheap money impetus to drive these ultra-sensitive markets higher
just isn't there anymore.

What's
next? We'll see. Property markets are among the most politically manipulated in
the world, so don't be surprised if governments step in to ease the
restrictions they've imposed almost as soon as prices show signs of wobbling.

But it's
a valuable lesson – more so even than bond prices, the global property market
is proving to be a real canary in the coal mine in terms of warning of higher
interest rates.

I'll be
keeping a close eye on developments all over the world as a result.